The conditions for filing Chapter Thirteen bankruptcy may be more stringent than you think. Contrary to popular belief, a Chapter Thirteen bankruptcy is not something that is simply granted automatically to people who cannot qualify for a Chapter Seven bankruptcy.
Chapter Thirteen vs. Chapter Seven
In simplified terms, a Chapter Seven bankruptcy is a liquidation of debt while a Chapter Thirteen bankruptcy is a reorganization of debt. There are other aspects to both of these bankruptcy options, but a Chapter Thirteen allows people to keep many of their assets while paying back debt using a court-approved payment plan. A Chapter Seven, on the other hand, eliminates a lot of the filer's debt but does not allow the filer to hold on to as many assets as allowed by a Chapter Thirteen bankruptcy.
Conditions for Filing Chapter Thirteen Bankruptcy
Since the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, the conditions for filing a Chapter Thirteen bankruptcy have become more stringent. Before you can file for any bankruptcy, the Act makes it mandatory that your attorney complete a survey of your complete financial status. Your attorney may refer to this as a Financial Means Test. After the test your bankruptcy attorney may find that you qualify for a Chapter Thirteen, a Chapter Seven, or that you qualify for both options.
Other conditions for filing Chapter Thirteen bankruptcy include:
- You must file all the necessary documents for filing. A bankruptcy attorney can help you with these forms.
- You must be able to afford a restructuring of debt. If the restructure will still leave you with a large monetary deficit each month it will do you no good.
- Debts that are court-ordered, such as child support, must be in good standing.
- Tax returns for the past four years must have been filed.
- It cannot appear to the court as though you are abusing the bankruptcy system. Even if you pass the Financial Means Test, your petition for bankruptcy can be dismissed by the court if the judge feels for any reason as though you are attempting to exploit the system.
- Other conditions can apply, depending on your location and the individual factors involved in your situation.
These factors should all be discussed with a competent bankruptcy attorney. You can obtain and file bankruptcy documents on your own, but a bankruptcy attorney will know the intricacies of the process. It is up to you whether or not to hire a bankruptcy attorney, but if you are not familiar with the process then it is advisable to seek out legal assistance.
Choosing a Chapter Thirteen
Why would anyone want to choose a Chapter Thirteen bankruptcy over a Chapter Seven? The idea of liquidating debt instead of restructuring it may seem quite alluring to many consumers, but with a Chapter Seven you may lose many of your assets because they will be sold by a trustee and the profits will be distributed to your creditors. A Chapter Thirteen bankruptcy allows you to retain many of your assets. If you don't want to lose some of your personal property you may want to look into a Chapter Thirteen instead of a Chapter Seven.
Some people would like to file for a Chapter Seven, but after the Financial Means Test is conducted by the attorney it becomes obvious that a Chapter Thirteen is the only option. One of the benefits of a Chapter Thirteen bankruptcy is that it will remain on your credit report for only seven years as opposed to the ten years that a Chapter Seven is listed. You can also reorganize some debt with a Chapter Thirteen that would not be discharged with a Chapter Seven, and this can be the kind of thing that may allow you to get back on your feet financially.